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Inference of Binary Regime Models with Jump Discontinuities

Author

Listed:
  • Milan Kumar Das

    (Academia Sinica)

  • Anindya Goswami

    (IISER Pune)

  • Sharan Rajani

    (Carnegie Mellon University)

Abstract

Identifying the instances of jumps in a discrete-time-series sample of a jump diffusion model is a challenging task. We have developed a novel statistical technique for jump detection and volatility estimation in a return time series data using a threshold method. The consistency of the volatility estimator has been obtained. Since we have derived the threshold and the volatility estimator simultaneously by solving an implicit equation, we have obtained unprecedented accuracy across a wide range of parameter values. Using this method, the increments attributed to jumps have been removed from a large collection of historical data of Indian sectorial indices. Subsequently, we have tested the presence of regime-switching dynamics in the volatility coefficient using a new discriminating statistic. The statistic has been shown to be sensitive to the transition kernel of the regime-switching model. We perform the testing using Bootstrap method and find a clear indication of presence of multiple regimes of volatility in the data. A link to all Python codes is given in the conclusion. The methodology is suitable for analyzing high frequency data and may be applied for algorithmic trading.

Suggested Citation

  • Milan Kumar Das & Anindya Goswami & Sharan Rajani, 2023. "Inference of Binary Regime Models with Jump Discontinuities," Sankhya B: The Indian Journal of Statistics, Springer;Indian Statistical Institute, vol. 85(1), pages 49-86, May.
    • Handle: RePEc:spr:sankhb:v:85:y:2023:i:1:d:10.1007_s13571-022-00277-2
    DOI: 10.1007/s13571-022-00277-2
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